Wednesday, December 14, 2011

Will Nickels and Pennies Soon Disappear?

Will Nickels and Pennies Soon Disappear?

Mises Daily: Tuesday, December 13, 2011 by 


Back in December 2006, the US Mint, in yet another power grab over economic life, made it illegal to melt pennies and nickels in addition to exporting large quantities of either. Though the Mint admitted there was no evidence coin melting was occurring, this was the government's attempt at being proactive to prevent the destruction of its legally imposed currency.

So why the concern over people melting down coinage that supposedly belongs to them?

Back when the ban was implemented, the high price of copper was responsible for driving up the price of individual nickels and pennies in terms of metal content. Due to their copper content (nickels minted between 1946 and 2011 are composed of 75 percent copper and pennies minted between 1909 and 1982 are composed of 95 percent copper), both coins have a higher value as metal than as legal tender.

The irony in the government banning the melting of its own issued currency lies in the fact that its own actions contribute to the higher price of copper. Whenever the Federal Reserve engages in dollar easing (read: money printing), this newly printed "wealth" often translates into higher stock and commodity prices. Even the very announcement of increased monetary intervention by Fed officials, including Chairman Ben Bernanke, tends to boost market confidence as stocks rally almost immediately. Recently, commodities and stocks soared when the Fed lowered the interest rate it charges for foreign central banks to utilize its dollar swap lines without explicitly mentioning its intention to sterilize such transactions to prevent an increase in its balance sheet.

Basically, the Fed once again told the world that it opened up the dollar floodgates just a bit more to offset a crisis in Europe.

Along with its intention to hold short-term interest rates near zero until "mid 2013," Bernanke and company are standing by ready to keep borrowing costs suppressed by entering into the market to purchase treasuries. Presently the M2 money supply has been growing at a 15 percent annual rate for the past 6 months:

Figure 1
(Chart via FRED)

So what does all this mean for nickels and pennies minted prior to 1983?

Gresham's law, named after Sir Thomas Gresham, who was a financial agent of the English Crown in the 16th century, states that overvalued money drives undervalued money out of circulation: "bad money drives out good" for short. More accurately, the law should state something along the lines of "government-enforced parities that alter the market value of money have the effect that overvalued money drives out undervalued money." Because in a free market those products and goods that are of higher value stick around longer than low-quality products, Gresham's law only applies when government monetary intervention is present.

To help understand the effect of Gresham's law, Jörg Guido Hülsmann provides a simple thought construct in The Ethics of Money Production:

Suppose for example that both gold and silver are legal tender in Prussia, at a fiat exchange rate of 1/20. Suppose further that the market rate is 1/15. This means that people who owe 20 ounces of silver may discharge their obligation by paying only 1 ounce of gold, even though they thereby pay 33 percent less than they would have had to pay on the free market. Prussians will therefore stop making any further contracts that stipulate silver payments to protect themselves from the possibility of being paid in gold; rather they will begin to stipulate gold payments right away in all further contracts. And another mechanism operates to the same effect. People will sell their silver to the residents of other countries, say England, where the Prussian fiat exchange rate is not enforced and where they can therefore get more gold for their silver. The bottom-line is that silver vanishes from circulation in Prussia; and only gold continues to be used in domestic payments. The overvalued money (here: gold) drives the undervalued money (here: silver) out of the market.

So with nickels worth slightly more than 5¢ and pennies minted before 1982 worth almost 3¢ due to their copper content, it isn't hard to imagine that they will someday disappear from circulation as the Fed continues to expand its monetary base. Kyle Bass, who heads the hedge fund Hayman Capital Management, has already purchased $1 million worth of nickels according toBusiness Insider. For any more proof that the 5¢ and certain 1¢ pieces may disappear soon, just consider how many Roosevelt dimes or Washington quarters minted pre-1965 you see around today. Both are composed of 90 percent silver and are worth far more for their metal content than they are as legal tender.

Anyone looking to make a small investment might think twice about throwing nickels or pre-1983 pennies into a jar with the rest of their accumulated change.


Rodrigo González Fernández
Diplomado en "Responsabilidad Social Empresarial" de la ONU
Diplomado en "Gestión del Conocimiento" de la ONU
Diplomado en Gerencia en Administracion Publica ONU
Diplomado en Coaching Ejecutivo ONU( 
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Soliciten nuestros cursos de capacitación  y consultoría en GERENCIA ADMINISTRACION PUBLICA -LIDERAZGO -  GESTION DEL CONOCIMIENTO - RESPONSABILIDAD SOCIAL EMPRESARIAL – LOBBY – COACHING EMPRESARIAL-ENERGIAS RENOVABLES   ,  asesorías a nivel nacional e  internacional y están disponibles  para OTEC Y OTIC en Chile

The Changing Nature of Global Gas Projects

The Changing Nature of Global Gas Projects

I wrapped up my recent trip to Russia at 4 a.m. last Friday in a Moscow airport. 

One thing is certain about my trips to Russia - the time schedule is always off.

But I can't complain; the weeklong visit provided many benefits. 

As I told you two weeks ago the primary purpose of my trip was to evaluate natural gas projects in northern Russia. It's becoming increasingly necessary to estimate global-wide gas prospects in order to determine effective price levels.

That's because the age of "spot" market prices in the gas sector is rapidly approaching. 

And it's about to change the way the markets operate for everyone involved.

On the Spot

Spot markets allow for a very short-term exchange of volume (usually 72 hours) and serve to undergird longer-term contract pricing.

The spot markets tend to offset longer contract terms by providing volume at what is usually a discount to the contracts, which are more properly futures contracts on natural gas.

However, natural gas has not had featured spot sales except in those areas that serve as major centers for pipelineinterchange. Those areas then become provisional benchmarks for wider markets.

This is different than crude oil, which can be moved by tankers to virtually anywhere there is a decent port, allowing the establishment of local spot markets. Gas, on the other hand, has been limited by how far pipelines extend. 

But the acceleration of liquefied natural gas (LNG) trade - in which gas is cooled to a liquid state, transported by tanker, and then "regasified" on the other end - has altered the picture. 


Indeed, with more than 90 new terminals set to open, under construction, or in the final stages of approval worldwide, LNG is one of the most decisive changes to hit the energy sector in decades.

LNG imports are essential to meet energy needs in parts of the world where there's little domestic supply. Exporting LNG also provides a new outlet in those regions where new unconventional gas volume strains local demand and threatens adequate price levels for producers.

This latter consideration affects all major shale gas production basins in North America, from the Horn River and Montney in Western Canada to the Marcellus, Barnett, and Fayetteville in the United States. 

And, as I have noted on several occasions, the rise of LNG trade can serve as a major excess production drain off for the United States. 

What LNG does not do, however, is address a growing global concern. 

See, it is one thing to provide an end market for additional production. It is quite another to integrate the production assets into the equation.

Let me explain. 

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Reassessing Asset Values

LNG trade - involving gas production in one country and usage in another - benefits the volume of gas involved, but does nothing to provide for pricing the land assets where production takes place. 

Unlike crude oil, which is now mostly produced in countries that serve as exporters and have little overall domestic demand for the product (Russia being a major exception), gas remains primarily a domestically utilized energy. That means the primary market served remains a local one.

However, should international demand become the primary determinant of gas prices, the value of productive acreage would likely become dependent on the LNG trading price. 

Yet relying on LNG to determine the price of both commodity and field would be the energy-sector equivalent of the tail wagging the dog.

Given that the rapid rise of global gas trade is now a certainty, there needs to be a way to balance local, national, and international gas prices with the underlying value of the land where production takes place.

Which brings me back to the other reason I traveled to Russia. 

The Financing Gap

As the costs of major gas projects increase, especially in locations like the Arctic, new funding prospects are required. 

As I've told you, Moscow will not allow foreign majors to control these new mega projects, so there are few established ways of obtaining the huge amount of necessary funding.

My suggestion is to use assets in one basin to collateralize financing projects in another country. 

That would allow the value of acreage that is, or could be, used for gas production in, say the United States, to be tied to the value of production in Russia (for conventional gas) or Poland (for shale gas).

Extractions elsewhere serve to buttress the overall value of U.S. assets, while the American assets serve as a financial base for projects abroad and participate in the revenue flow of foreign production.

The suggestion likewise provides for cross-finance of U.S. projects from proceeds generated elsewhere, as well as the development of genuine holdings not requiring that one market wins while another loses.

In short, this overcomes competition by providing a win-win scenario to replace the zero-sum game usually played (somebody's production undercuts the market access of somebody else).

We end up creating a genuine global view of production without discounting the value of anyone's fields, anywhere.

And What of the Individual Retail Investor?

Well, we certainly have been talking a lot about Master Limited Partnerships (MLPs) in the U.S. gas industry. Remember, these are the holdings that control production, or more often, midstream services (pipeline, storage, gathering, and initial processing). 

By law, MLPs pass all profits to partners, allowing the holding to avoid corporate taxes. All tax liability on profits rests with the individual partners. 

When an MLP chooses to do a public offering, the shares that make up that offering participate in the flow-through profits via dividends that are considerably better than market averages. That way average investors are able to participate without becoming partners in the MLP itself.

I have suggested the same approach for what I have in mind. Placing a portion of these European/Russian/U.S. cross-holdings, representing gas deposits in various countries, as accessible public offering provides three main benefits: 

  • It raises additional funding for gas projects using existing acreage and/or production as collateral.
  • It provides predictability for the local impact of variations in field value.
  • And it expands participation to average investors worldwide.
The first of these initial public offerings (IPOs) will probably emerge in Frankfurt (which is why I was there two weeks ago). The prompt issuances of depositary receipts will make them accessible in major markets throughout the world. 

Sometimes the way to offset commodity warfare and the "either-you-win-or-I-do" view is to give each participant a vested stake in the idea of working together.

I'll let you know how it works out.

News and Related Story Links: 


Rodrigo González Fernández
Diplomado en "Responsabilidad Social Empresarial" de la ONU
Diplomado en "Gestión del Conocimiento" de la ONU
Diplomado en Gerencia en Administracion Publica ONU
Diplomado en Coaching Ejecutivo ONU( 
 CEL: 93934521
Santiago- Chile
Soliciten nuestros cursos de capacitación  y consultoría en GERENCIA ADMINISTRACION PUBLICA -LIDERAZGO -  GESTION DEL CONOCIMIENTO - RESPONSABILIDAD SOCIAL EMPRESARIAL – LOBBY – COACHING EMPRESARIAL-ENERGIAS RENOVABLES   ,  asesorías a nivel nacional e  internacional y están disponibles  para OTEC Y OTIC en Chile